A profitable tax loophole for real estate could be axed in Manchin's new deal to ease inflation

A profitable tax loophole for real estate could be axed in Manchin's new deal to ease inflation
When real estate is sold, it's typically taxed at a capital gains rate, which is lower than an income tax. That could be changing.Rick Gomez/Getty Images
  • Sen. Joe Manchin struck a surprise deal on Wednesday with Senate Majority Leader Chuck Schumer.
  • The deal, which would put billions toward climate spending, is offset by targeted taxes.

A surprise spending deal by Democrats might lead to heftier tax bills for some ultra-wealthy real estate investors.

On Wednesday night, key centrist Democrat Senator Joe Manchin released a statement that reverberated throughout the halls of Congress — and the pockets of high-earning investors: He had struck a deal with Senate Majority Leader Chuck Schumer, and part of it entailed closing up the carried interest loophole.

Carried interest essentially lets investors, especially private equity managers, pay a lower tax rate on their income. That's because, when they invest in a company, they may receive their cut of the profits through things like assets, rather than a check. When a long-held asset, like a stock or piece of real estate, is eventually sold, it's taxed at what's called the capital gains rate — a far lower rate than the straightforward income tax rate.

Some real estate managers "pay a much lower tax rate than others who make their living from bonuses and wages and salaries," according to Steve Rosenthal, a senior fellow at the Tax Policy Center, because their compensation is structured with carried interest.

While closing the rule may not have a negative impact on the entire real estate industry, Bobby Fijan, a real estate developer and founder of FORM, says it could transform how real estate investors structure their businesses.


"What I expect to happen is that it will disincentivize risk taking or it will lower net profits for developers," he told Insider. "I anticipate it will have a significant impact in the way that real estate developers structure their fees."

Fijan says carried interest has been very valuable for real estate developers as it's been a profitable loophole — but he does not think Manchin's proposal is unfair.

"I don't think it's an awful thing being done," he said. "Real estate has gotten special status, so it is not an unreasonable loophole to close."

The deal that Manchin has struck — called the Inflation Reduction Act of 2022 — would extend the holding period for carried interest for five years. In simpler terms, that means that you can't get the preferential tax rate unless you wait at least five years to sell off your assets.

The Inflation Reduction Act is far from a done deal, though. While most Democrats seem to be onboard, the specter of Arizona Sen. Kyrsten Sinema looms. Sinema, the other key centrist vote in Democrats' razor-thin majority, has repeatedly pushed back on any tax hikes. So far, Sinema has dodged inquiries about whether the package has her stamp of approval.


"I know this has been something that Sen. Sinema had concerns about," Senate Finance Committee member and GOP whip John Cornyn of Texas told Insider's Warren Rojas. "And I don't think they checked with her beforehand,"